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“If, as a result, projects take longer to complete, and become costlier and
riskier to execute, we would expect these factors to exert downward pressure on
the ratings of the mining companies,” Andrew Metcalf, an analyst in Moody's
Corporate Finance Group and author of the report, said in a statement.

Mining projects require significant amounts of water, especially in the
processing of ore. Their supply typically includes captured surface water and
groundwater or water from long-term contracts with local municipalities.

Greater water usage due to population growth, urbanization, and rising
incomes has driven mining companies to increasingly compete with local
communities and the agricultural industry for water supplies, Moody's said. As a
result, both project development costs and operating costs have climbed while
mining companies turn to alternative water sources, such as desalination
facilities, and pipelines to transport water over long distances.

Rising Environmental Compliance Costs

The report said mining companies also face rising costs associated with
environmental compliance as well as growing risks from noncompliance, which
could lead to production stoppages, fines, and damage to reputations.

Mining companies will spend about $12 billion globally on water
infrastructure in 2013, according to Global Water Intelligence, a U.K.-based
water consultant. That figure represents a 275 percent increase from the total
spent on water infrastructure in 2009.

“One of the main reasons why water management costs are rising is because the
majority of new mining development projects are based in water scarce regions,
such as Australia, South Africa, Chile and Peru,” Moody's said.

However, “the pace of project development in water-scarce countries shows no
sign of abating,” the report said.

Investors to Consider Water Risk

Moody's predicted that smaller mining companies in water-scarce regions will
be the most vulnerable to ratings drops, while larger, globally diversified
mining companies will be able to better preserve their ratings profiles even as
they absorb higher costs.

In the future, capital markets are increasingly likely to factor
environmental risks into their lending and investment decisions. Moody's said it
also expects to place greater analytical emphasis on rated mining companies'
environmental policies and risk management practices in its credit
assessments.

In a 2010 report by a network of institutional investors, the mining industry
scored the highest overall among water-intensive industries for managing and
disclosing water-related risks to investors. The vast majority of the companies
analyzed in the report fell short in disclosure on water use and water scarcity
concerns.

The International Council on Mining and Metals has been studying good
practices in the mining industry for water resource management since 2008. The
council also is working to develop an international framework for water
reporting and accounting.

“Given the serious work in this area that is ongoing, it would seem to be
premature and short-sighted to lower mining company credit ratings,” Nancy
Gravatt, a spokeswoman for the National Mining Association, told BNA in an
email.

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